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81.
You want to invest in a riskless project in Sweden. The project has an initial
cost of SKr3.8million and is expected to produce cash inflows of SKr1.75
million a year for three years. The project will be worthless after three
years. The expected inflation rate in Sweden is 3.2 percent while it is 4.3
percent in the U.S. A risk-free security is paying 5.5 percent in the U.S. The
current spot rate is $1 = SKr7.7274. What is the net present value of this
project in Swedish kroner? Assume the international Fisher effect applies.
82.
You are analyzing a project with an initial cost of £48,000. The project is
expected to return £11,000 the first year, £36,000 the second year and
£38,000 the third and final year. There is no salvage value. The current spot
rate is £0.6211. The nominal return relevant to the project is 12 percent in
the U.S. The nominal risk-free rate in the U.S. is 4 percent while it is 5
percent in the U.K. Assume that uncovered interest rate parity exists. What
is the net present value of this project in U.S. dollars?
83.
You are analyzing a project with an initial cost of £130,000. The project is
expected to return £20,000 the first year, £50,000 the second year and
£90,000 the third and final year. There is no salvage value. The current spot
rate is £0.6211. The nominal risk-free return is 5.5 percent in the U.K. and 6
percent in the U.S. The return relevant to the project is 14 percent in the
U.S. Assume that uncovered interest rate parity exists. What is the net
present value of this project in U.S. dollars?
84.
Based on the information below, what is the cross-rate for Australian
dollars in terms of Swiss francs?
85.
Suppose the spot exchange rate for the Canadian dollar is C$1.28 and the
six-month forward rate is C$1.33. The U.S. dollar is selling at a _____
relative to the Canadian dollar and the U.S. dollar is expected to _____
relative to the Canadian dollar.
86.
Based on the following information, the value of the U.S. dollar will _____
with respect to the yen and will _____ with respect to the Canadian dollar.
87.
Suppose the Japanese yen exchange rate is ¥114 = $1, and the United
Kingdom pound exchange rate is £1 = $1.83. Also suppose the cross-rate is
¥191 = £1. What is the arbitrage profit per one U.S. dollar?
88.
Suppose the exchange rates are as follows:
Assume interest rate parity holds and the current six-month risk-free rate in
the United States is 3.1 percent. What must the six-month risk-free rate be
in Great Britain?
89.
Suppose your company imports computer motherboards from Singapore.
The exchange rate is currently 1.5803S$/US$. You have just placed an
order for 30,000 motherboards at a cost to you of 170.90 Singapore dollars
each. You will pay for the shipment when it arrives in 120 days. You can sell
the motherboards for $148 each. What will your profit be if the exchange
rate goes up by 8 percent over the next 120 days?
90.
Suppose the spot and six-month forward rates on the Norwegian krone are
Kr6.36 and Kr6.56, respectively. The annual risk-free rate in the United
States is 4.5 percent, and the annual risk-free rate in Norway is 7 percent.
What would the six-month forward rate have to be on the Norwegian krone
to prevent arbitrage?
91.
You observe that the inflation rate in the United States is 3.5 percent per
year and that T-bills currently yield 3.8 percent annually. What do you
estimate the inflation rate to be in Australia, if short-term Australian
government securities yield 4.5 percent per year?
92.
Suppose the spot and three-month forward rates for the yen are ¥128.79
and ¥135.22, respectively. What is the approximate annual percent
difference between the inflation rate in the U.S. and in Japan?
93.
Assume the spot exchange rate for the Hungarian forint is HUF 215. Also
assume the inflation rate in the United States is 4 percent per year while it
is 9.5 percent in Hungary. What is the expected exchange rate 5 years from
now?
94.
Lakonishok Equipment has an investment opportunity in Europe. The
project costs €12 million and is expected to produce cash flows of €2.7
million in year 1, €3.1 million in year 2, and €2.8 million in year 3. The
current spot exchange rate is $1.3/€. The current risk-free rate in the
United States is 5 percent, compared to that in Europe of 3.5 percent. The
appropriate discount rate for the project is estimated to be 18 percent, the
U.S. cost of capital for the company. In addition, the subsidiary can be sold
at the end of three years for an estimated €6.5 million. What is the NPV of
the project?
Essay Questions
95.
Using currencies A, B, and C construct an example in which triangle
arbitrage exists and then show how to exploit it.
96.
What is the relationship between the value of the dollar and the value of the
euro in relation to the rate of inflation in the United States?
97.
How well do you think relative purchasing power parity (PPP) and
uncovered interest parity (UIP) behave? That is, do you think it's possible to
forecast the expected future spot exchange rate accurately? What
complications might you run into?
98.
What conditions are necessary for absolute purchasing power parity (PPP)
to exist? Is it realistic to believe PPP can exist within a country let alone
across national borders?
99.
Describe the foreign currency and home currency approaches to capital
budgeting for a foreign project. Which is better? Which approach would you
recommend a U.S. firm use? Justify your answer.
